The financial Zeitgeist and eroding resistance to change

Anyone learning Chinese soon encounters the classic tale of Zhang Guiya a county magistrate patrolling government buildings. He meets a minor official rapidly leaving the money vault. “Why are you in such a hurry” asks the magistrate who subsequently finds a valuable metal piece hidden in the man’s head band. As the magistrate prepares to sentence him, the thief demands “Would you kill someone just for stealing a bit of copper?”Sending him to be executed the unforgiving magistrate tells all the people:

“Dripping water wears away stone, let alone stealing every day.”

Setting an ethical tone in financial services is rather like water slowly falling on a hard surface. At first it may seem unimportant and make no difference. Yet a steady stream of similar drops can eventually begin to alter the surface. Putting it slightly differently, perhaps the Zeitgeist or spirit of the times around financial services is starting to change. Zeitgeist is one of those perfect German words which try to explain something rather spooky—fashion, or what’s happening around us, the sum of human experience. The Zeitgeist for ethics is hard to read, even for insiders. Complexity, media hype, regulatory climate all make this tricky territory to interpret. A good place to start is with a core CEO responsibility—setting the ethical tone. Sounding authentic and gaining credibility about ethics by telling stakeholders what you believe in and what you expect, tests even the most articulate and persuasive CEO. The latest “drop” to fall in the drumbeat of demand for change landing on financial services comes from Niall Booker, the Co-op bank’s new CEO. He’s come out fighting as rescuer of the beleaguered bank. His robust tone which has the ring of authenticity is right on target.[1]His latest lengthy public statement opts for more transparency. He bravely admits his bank has made mistakes. But he also claims it will continue to be ethical, by pursuing its past policies and developing new ones. He further adds the bank will soon be asking its customers for “their views on our ethical policy and wider values”. An earlier “drop” came from Antony Jenkins of Barclays. Last year he too issued an equally forthright CEO message amid scepticism across the banking, let alone the rest of the commercial world. Both he and Booker want to re-inject fresh values and ethics into their banks. While good intentions and public statements are an encouraging start, in this area of dubious corporate behaviour actions always speak louder than words. Jenkins in particular shows why setting the tone is only a necessary starting point, while insufficient to achieve real change. His halo for ethicality became decidedly tarnished when he recently sanctioned huge bonuses despite the bank losing money. Three further “drops” in the steady stream wearing away at the complacency and resistance of the banking world have been stern messages about ethics from both Marc Carney who heads up the Bank of England and Christine Lagaard who runs the IMF; more recently the UK chancellor has signalled a new willingness to tackle reform. There remains a long way to go before these and other “drops” start to visibly alter the resistant financial surface, where many participants yearn to return to business as usual.

Bank Moan

Anders Wilkof a motorist in Finland may not exactly seem yet another “drop” in the steady drip on the financial carapace but it could be another sign of the times. Last year Mr Wilkof was fined for driving 77 kph in a 50 kph zone. Like many a rich motorist the millionaire Swedish business man could normally have laughed off the expected paltry motoring penalty.[2] Not this time. The fiendish Finns fine motorists based on their wealth, which meant Mr Wilkof received a staggering £80,000 fine—because he could afford it. Naturally he complained bitterly the fine was unfair and disproportionate. Could this principle about to be applied to banks? The size of fines has remained relatively modest, compared to their assets and continued profitability. Until that is, the $10 billion fine now proposed for BNP Parabus for sanctions busting in Iran. This fine would dwarf HSBCs $1.9 billion penalty in 2012 for similar offenses, and the $2.6 billion Credit Suisse paid recently to settle tax evasion claims. From the bank’s moan of agony, echoing Mr Wilkof’s, the proposed fine is clearly more than a drop in the ocean. “Unfair and disproportionate” it complained and went crying to the French president. He duly discussed the case with President Obama amid suggestions it could put talks on a trans-Atlantic trade pact at risk. But Obama dismissed any prospect that he might intervene to help the bank.To continue our liquid metaphor, if this punishment goes ahead it could prove something of a watershed for the financial industry. Future fines that don’t send shock waves through a company are likely to been seen as mere gesture. So expect regulators to go for safety and issue increasingly impactful penalties.

Hidden Forces

Yet another sign of the changing Zeitgeist is the still growing investment in what is now a compliance industry. In less than a decade, we have seen an entirely new profession emerge. Whole armies of specialist staff labour to ensure compliance, reduce risk and encourage the good behaviour of an organisation’s employees. Like hidden strata in a rock that adds extra resistance to being worn away though, there are human factors making real change hard to achieve such as when self-interest morphs into greed and selfishness, when people suffer from stunted moral development and do not know right from wrong, or when some individuals equate moral behaviour with legal behaviour—just because its legal does not make something ethically right.These may be harder to tackle, though even here we see signs of new thinking –such as the realisation that formal compliance systems are never going to be enough to ensure ethical performance. Left to their own devices most people do the right thing, so long as they know what the right thing is. As the new CIPD journal Work puts it “Together with other social changes, it means we are starting to embrace a world where business is done more ethically.”Finally, although executives in financial services struggle to see the benefits of sticking to ethical standards[4] there are signs many are starting to recognise this is a direct route to growth.Not only do customers value ethical companies more, employees want to work for ethical companies. They would also rather be paid less than work for an unethical one.Most firms are attempting to improve ethical standards and research confirms[5] a large majority of senior leaders agree ethical conduct is just as important as financial success at their firm.

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